The tax law saw a significant reform in 2018. Eighty percent of tax filers around the country will pay an average of $700 to $900 less in taxes in 2018 as compared to 2017. However, in our home state of Maryland, tax filers are estimated to owe more than the national average.
If you are surprised by your tax bill and find yourself asking the question “Why do I owe on my taxes this year?”, then let’s take a deeper dive into the tax law changes that may be the culprit.
Higher Standard Deduction
The standard deduction has increased from $6,350 in 2017 to $12,000 in 2018 for single filers and from $12,700 in 2017 to $24,000 for married couples filing jointly. In practicality, this means that significantly more households are taking the standard deduction in 2018. For most people who were previously taking the standard deduction, this is a good thing. However, due to the elimination of many deductions, you may have underpaid on your taxes in 2018 if you previously itemized deductions and are now taking the standard deduction.
For 2018, a $10,000 limit was placed on the state and local tax deduction (SALT). Previously, filers could deduct their entire property tax as well as their income tax or sales tax that they paid throughout the year in their state. In states with high income and property taxes, such as Maryland, this can be especially burdensome.
Eliminated or Capped Itemized Deductions
The new tax law eliminated many itemized deductions that were claimed by nearly 28 million people in 2017. Some of the itemized deductions that are gone from your 2018 tax return include:
- Casualty and theft losses – under the old tax code, you could claim an itemized deduction for property losses that weren’t reimbursed by your insurance. Losses from fire, vandalism, natural disaster, and accidents fell under this category. In 2018 you can only claim this deduction if the damage is due to a disaster declared by the president.
- Tax prep fees – In 2017, you were able to deduct tax preparation fees and investment expenses if they exceeded 2 percent of your gross income. In 2018, these itemized deductions are gone.
- Mortgage interest – In 2017, you were able to write off interest up to $1 million in mortgage debt. For 2018, you can only claim a deduction for interest up to $750,000 of qualified residence loans.
Elimination of Exemptions
Prior to 2018, taxpayers could claim an exemption for themselves, their spouse, and their dependents. Each exemption lowered their taxable income by $4,050. Under the new tax law, all personal exemptions have been suspended for the 2018-2025 tax years.
How do I avoid owing taxes next year?
Make it a habit to update your W-4 with your employer every year. It’s still early in 2019, so if you haven’t updated your W-4, talk to your company’s HR or internal accounting department and update it now. A Certified Public Accountant (CPA) can help you calculate how much to withhold from your paycheck and can help you maximize your tax savings. You can also use this withholding calculator on the IRS website to help estimate how much you should be withholding.
In addition to withholding more from your paycheck, you can also lower your taxable income by contributing more to a 401(k) or an IRA plan. For 2019, you can contribute up to $19,000 into your 401(k) ($25,000 if you’re 50 or older) and up to $5,500 into an IRA ($6,500 if you’re 50 or older).
Are you still unsure why you owe on your taxes this year? Feel free to drop me a note below and we can discuss!
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